More work on risk management needed: analysts
The IMF is highly likely to include the yuan into its Special Drawing Rights (SDR) currency basket and financial institutions will have to work on their risk management abilities, analysts said Sunday, shortly after the latest comments from the IMF supporting the yuan's inclusion.
Following the presentation of a paper by the IMF's staff members to the IMF's executive board suggesting that the yuan meets the criteria for being included in the SDR basket, Christine Lagarde, the IMF's managing director, said Friday (US time) that she supports the staff's conclusion, according to an e-mail sent by the IMF to the Global Times Saturday.
In the paper, the staff proposed that the executive board should believe that the yuan will become freely usable and should include it in the basket as a fifth currency, along with the British pound, euro, Japanese yen and the US dollar, the e-mail said. "I support the staff's findings," Lagarde was quoted as saying in the e-mail.
She also noted that the decision on whether the yuan should be included in the SDR basket rests with the IMF's executive board meeting, which will be held on November 30.
The People's Bank of China (PBC), the country's central bank, said that Lagarde's statement was an acknowledgement of the progress in China's recent economic development, reform and opening-up, according to a statement posted on the PBC's website Saturday.
Economists told the Global Times Sunday that the matter has almost been settled, and that the yuan will soon join the SDR currency basket. However, there are potential risks that will have to be controlled as the yuan becomes freely tradable and convertible.
Ding Zhijie, an economics professor at the University of International Business and Economics in Beijing, said the IMF's paper showed the fund recognized the efforts China has made in terms of internationalization of its currency.
"The nation's foreign trade volume has been steadily increasing and the government has shown its intention to further open up its financial market, which is in line with the recently released proposals for the 13th Five-Year Plan," Ding said, noting that the government will promote further opening-up of the country's capital market, for example by allowing foreign institutional investors to buy yuan-denominated assets.
A research note published by Mizuho Securities Asia on November 2 said convertibility of the yuan will incorporate capital account liberalization, offshore circulation, interest-rate liberalization and a more flexible exchange-rate mechanism.
China has made progress in recent years in developing its offshore market and further liberalizing the exchange rate, the note said.
Xiang Songzuo, chief economist with Agricultural Bank of China, agreed with the research note's view. "Progressively launching free trade zones and starting trials of cross-border trade settlement in yuan in cities like Shenzhen and Shanghai have all helped to speed up the globalization of the currency," Xiang told the Global Times Sunday.
According to an annual report issued by the PBC in May, use of the yuan in cross-border receipts and payments reached 9.95 trillion yuan ($1.6 trillion) in 2014, and up to 189 countries used the yuan in transactions with China. Also, yuan settlement under the current account reached 6.55 trillion yuan, up 42 percent year-on-year, the report noted.
The yuan has been one of the top five currencies in terms of global payments since November 2014, global financial messaging provider SWIFT said in an announcement published in January.
In December 2014, the yuan reached a record high share of 2.17 percent of global payments by value, close to the Japanese Yen which had a share of 2.69 percent, according to the announcement.
Still, analysts suggested that when the yuan is included in the SDR currency basket, the authorities should continue working on financial market reforms such as improving risk management systems and scrutinizing flows of hot money.
"Surely, there will be increasing global demand for the currency," Xiang said, noting that an accelerated two-way interaction of assets could trigger fluctuations in the exchange rate, which may bring the risk of losses for institutions and companies.
